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Which Mortgage is Right for You?
If you're buying a home for the first time or the first time in a long time, the homebuying process may feel overwhelming. With so many mortgage options to choose from and terminology that may be unfamiliar, it can seem confusing, but it doesn’t have to be. Here’s a simple breakdown of the most common mortgage types and which may be right for you.
Conventional Mortgages
Fixed Rate Mortgage
A fixed rate mortgage is the most common, traditional type of mortgage. It has a fixed rate and monthly loan payment. (Keep in mind, property taxes and insurance will still fluctuate.) You can choose from 10, 15, 20, and 30-year terms. A 30-year term is the most popular, but which term is right for you will vary based on your individual circumstances. A 3% down payment is required, however 20% is often recommended. This may allow you to qualify for a lower rate and opt out of paying Private Mortgage Insurance (PMI), which is required for most loans with a down payment of less than 20%.
When to Consider It: If mortgage rates are low, you will likely want to take advantage of a fixed rate mortgage to lock in the rate. It’s also often the best choice if you're planning to stay in the house 15-30 years.
What You Should Know: Conventional mortgages are a little harder to qualify for than some other mortgage types.
Adjustable Rate Mortgage
With adjustable rate mortgages (ARMs), the rates are fixed for a given period, usually 5, 7, or 10 years. This is called the introductory period. After the introductory period, the mortgage becomes adjustable for the duration of the loan. Your interest rate and monthly payment will fluctuate based on market conditions.
When to Consider It: The fixed interest rates during the introductory period are often less than that of a 30-year fixed mortgage, so if you’re hoping for a lower initial monthly payment, an ARM may be a good option. ARMs are also an option to consider if you’re only planning to stay in the home you’re purchasing for 5-10 years. Additionally, you may want to take out an ARM if interest rates are high and expected to come down.
What You Should Know: Your monthly payment may be somewhat unpredictable once you're in the adjustable period, however with Citadel, your rate can never increase or decrease more than 2% per year and can never be higher than 5% over your initial rate.
Government Backed Mortgages
FHA Loans
An FHA loan is similar to a fixed rate mortgage in that the interest rate and monthly payment is fixed and the terms range from 10-30 years. The benefit to this type of loan is the credit score and debt-to-income ratio requirements are not as stringent, so it’s easier to qualify for than traditional fixed rate mortgages. The down payment requirement is 3.5%.
When to Consider It: FHA Loans are often recommended for first time homebuyers, those with less than perfect credit, or with little funds to put down. If you have good credit and a down payment of 10% or more, another loan type may be less costly for you.
What You Should Know:
- You will have to pay an upfront mortgage insurance premium (MIP) of 1.75% in addition to monthly insurance.
- There are limits to the amount you can borrow which vary by county.
- The loan can also only be used for a primary residence, not a secondary home.
Homes financed by an FHA loan must meet basic health and safety requirements to get approved, so if you’re looking for a fixer-upper, an FHA loan might not work.
Learn more about FHA loans from HUD.gov
VA Loans
VA loans offer veterans, those currently serving in the U.S. military, reservists, and select surviving spouses a low-cost way to purchase a home. There is no down payment required and no private mortgage insurance required. The interest rate and monthly payment is fixed and the terms range from 10-30 years.
When to Consider It: If you’re a veteran, currently serving in the U.S. military, a reservist, or eligible surviving spouses interested in purchasing a home without having to make a hefty down payment.
What You Should Know:
- You will have to pay a VA funding fee of .5%-3.6%. Veterans may be exempt from paying the fee if they meet certain requirements.
- You won’t have much equity in your home to start if you choose not to make a down payment.
Learn more about VA Loans from VA.gov
USDA Loans
A USDA home loan is a loan backed by the U.S. Department of Agriculture to encourage home ownership in select towns and rural areas. There is no down payment required and no private mortgage insurance required. The interest rate and monthly payment is fixed and the term is 30 years.
When to Consider It: This loan is a good option for low-to-moderate income borrowers who want to achieve the goal of home ownership without having to make a down payment and/or are flexible about location or wish to live in a rural area.
What You Should Know:
- You are limited to homes in select areas. To find out if a home is eligible, you can enter the address here.
- Your income must not exceed 115% of the median income in the area.
- The loan can also only be used for a primary residence, not a secondary home.
Learn more about USDA Loans from USDA.gov
Questions about a mortgage?
Contact one of Citadel’s Mortgage Loan Advisors. They are experienced local consultants who can answer all your questions and talk through your options to help decide what might work best for you. Ready to apply? Get started here.
Want to learn more about buying a house?
Keep ReadingToday's Homebuying Landscape in the Philadelphia Market
A lot has changed in the Southeast Pennsylvania housing market (and across the country) over the last few years due to the pandemic, lack of inventory, and ever-changing interest rates. In this video, Citadel's Vice President of Real Estate Lending Lisa Albany highlights when and why an Adjustable Rate Mortgage (ARM) could be a beneficial option for some buyer's to consider in today's economy.
